General Electric Chairman and CEO Jeffrey Immelt volunteered Wednesday to forgo his US$11.7-million bonus for 2008, citing the 56% nosedive in the company’s stock price last year.

Two of Canada’s top bankers recently forfeited millions of dollars in bonuses even though their banks remain profitable.

Compared with their U.S. counterparts forced to defend perceived excesses to legislators in Washington who have doled out billions in taxpayer funded federal bailouts, the Canadian pinstripes overseeing highly profitable financial institutions appear responsible, rather than pre-emptive.

Clearly, Mr. Immelt and the Canadian bankers are engaged in smart public relations intended to avoid a public smackdown. After all, any act that caps or curbs executive pay is always well received and wildly popular with shareholders, and now especially taxpayers.

Witness the seething resentment toward the multimillion-dollar Wall Street pay packets that has unleashed a regulatory revolt similar to the frenzied activity that led to the Sarbanes-Oxley Act in 2002 in the wake of spectacular corporate scandals.

The latest legislative salvo is a provision introduced late last week by U.S. Senate Democrats that seeks to prohibit cash bonuses and almost all other incentive compensation for the top 20 officers and executives at each company that receives a U.S. government bailout under the US$787-billion stimulus package.

Given their healthier balance sheets, Canadian bankers have the luxury of appearing noble. Mr. Immelt, not so much.

Even so, their good deeds raises troubling questions about faulty corporate governance.

For one, why is there money in the compensation programs for the chief executives to give back at a time when most businesses are facing unprecedented hardship and not likely to meet their targets? More precisely, why would Mr. Immelt even qualify for a bonus worth almost US$12-million as GE’s shareholders have seen the value of their shares sliced in half?

“If the CEOs have left bonuses, something wasn’t right,” says Ken Hugessen, a compensation consultant and founder of Hugessen Consulting Inc. in Toronto. “It’s not ideal if the compensation committees are making decisions which the CEOs are then saying, ‘that can’t be right.’ ”

The global economic calamity has underscored what governance experts have long understood: The toughest ongoing job of a board of directors these days is setting compensation. The conundrum is pay for performance — in other words, establishing links between what executives are paid and the results they produce for the business.

Right now, that link is “tenuous or often not well thought through,” according to David Beatty, chairman of the Clarkson Centre for Business Ethics and Board Effectiveness and a professor at the Rotman School of Management at the University of Toronto.

Worse, he says, the compensation plans are not properly stress-tested to determine how much the CEO will earn in good economic times or if and when the business hits a catastrophic pothole, as many likely will in 2009.

In fact, only three major Canadian companies out of a group of 250 polled by Rotman last year disclosed that before they settled on a compensation plan for senior executives, they tested the outcomes to see how much variability there was in the pay schemes.

Mr. Beatty says he doesn’t know of a company that runs the outcomes of its pay packets against various outcomes of its peers, for example asking such questions as: Who is paid more? Who has the highest variability between pay and outcome?

In other words, it appears that few boards actually know the dollar implications of their compensation plans before they approve them.

“Boards have to be tougher minded and lot more thorough in examining the linkages between pay and performance so you don’t get into these pay for failure regimes, which clearly outrage everybody,” Mr. Beatty says. “They need to test drive their plans to see what it will look like under a number of scenarios.”

The parade of pinstripes on Capitol Hill atoning for their lucrative pay packets is a testament of the disconnect between the boardroom and directors who are factoring in different criteria, such as concern about a brain drain, and enraged shareholders who are watching their investments nosedive and taxpayers who see their money used to bail out billionaires.

“Boards are still way too driven by these claims about shortage of executive talent and the war on talent and if you don’t pay enough, they’ll leave. I think those are bogus arguments,” says David Lewin, a professor and compensation expert at the University of California, Los Angeles (UCLA).

For one, he says, directors are often swayed by compensation consultants who have been selected or referred by the CEO. At the same time, management teams prefer to keep their teams together and often lament to boards about their concerns of poaching.

A veteran Bay Street financial services executive concurs. “The big lie that no one will talk about is, if boards don’t pay huge salaries and bonuses, someone else will. The reality, especially with the banks in Canada, is that the boards at these organizations could lower the compensation by 50% and nothing would happen,” said the source who asked not to be named. “There’s no place for these people to go to make the kind of money they are used to making. It’s become an entitlement.”

Another issue is the calculation of bonuses based on revenues, not profit.

Boards should be aiming to tie executive compensation to performance that is not based on revenues or stock value, but rather on the rate of return on invested capital, Prof. Lewin says.

In other words, directors should be asking how much money did we have to invest in the business? What is the net operating profit? And the CEO and senior management should be compensated based on a rate of return compared with industry peers.

But reconfiguring executive pay is a work in progress that is shaped by our reactions to the past and present. Remember those stock options that were abolished a few years ago? Just think of the pain CEOs would be suffering with shareholders now!

Undoubtedly, government bailouts have put a harsh spotlight on compensation committees and boards of directors. Those entrusted with having to approve the plans are now coming under increasing pressure from a variety of sources, not just to exercise more scrutiny, but to actually rethink the executive compensation practices and policies they’re endorsing.